Houston’s Capital Royalty Evolving in Healthcare Growth Financing

[Updated Nov. 26, 2013] When Charles Tate moved home to Texas after a 35-year career as a New York finance executive, he started weighing opportunities for a new investment firm. Plenty of Texas investment firms were already focused on real estate and oil and gas. But Tate had seen first-hand the potential of biomedical innovation while serving on the boards of top healthcare institutions in the Houston area. Medical schools, research centers, and hospitals are clustered at the city’s sprawling Texas Medical Center.

“Because of the presence of the Texas Medical Center, I identified healthcare as a strategy in which we would be a pioneer and have an advantage,” Tate says.

In particular, Tate concluded that innovation in healthcare was going to depend on innovation in the financial sector to fund the growth of both its research institutions and its young biotechnology or device companies whose inventions could change the face of medicine. Financing can be hard to come by for these organizations. In 2003, Tate founded the Houston-based investment firm Capital Royalty to address this need.

Startups and research institutions frequently receive a stream of royalty payments from licensing their intellectual property to the large biopharmaceutical companies that develop drugs, medical devices, and other technology based on that intellectual property. Theoretically, the prospect of regular royalty income could help innovative institutions raise the upfront capital they need to expand labs, buy equipment, and fund their next R&D programs—just like a regular paycheck helps workers get car loans.

But many financiers don’t see small growth companies or institutions as great credit risks. Future royalty streams are hard to predict: checks can shrink when a high-flying drug is suddenly replaced by one even better, or cheaper, and new products can take longer than expected to be developed or approved in the ever-changing and often uncertain landscape of health care.

Over the past decade, however, Capital Royalty has developed … Next Page »